SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1,...

32
CITY OF STOCKTON Audit Report SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through June 30, 2011 PROPOSITION 1B FUND July 1, 2007, through June 30, 2011 JOHN CHIANG California State Controller August 2013

Transcript of SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1,...

Page 1: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

CITY OF STOCKTON

Audit Report

SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011

TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through June 30, 2011

PROPOSITION 1B FUND July 1, 2007, through June 30, 2011

JOHN CHIANG California State Controller

August 2013

Page 2: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

JOHN CHIANG

California State Controller

August 5, 2013

Anthony Silva, Mayor

City of Stockton

425 N. El Dorado Street

Stockton, CA 95202

Dear Mayor Silva:

The State Controller’s Office audited the City of Stockton’s Special Gas Tax Street Improvement

Fund and Traffic Congestion Relief Fund for the period of July 1, 2004, through June 30, 2011.

In addition, we audited the Proposition 1B Fund for the period of July 1, 2007, through June 30,

2011.

Our audit found that the City accounted for and expended its Special Gas Tax Street

Improvement Fund, Traffic Congestion Relief Fund, and Proposition 1B Fund in compliance

with requirements, except that:

The City charged ineligible interest expense of $10,686 to the Gas Tax Fund, through

negative interest allocation, and thereby understated the fund balance of the Gas Tax Fund by

$10,686.

The City charged ineligible interest expense of $45,469 to the Traffic Congestion Relief

Fund, through negative interest allocation, and understated other eligible expenditures by

$45,469. Therefore, the overall Traffic Congestion Relief Fund balance is unchanged.

The Gas Tax Fund cash was impaired because it was pooled with other funds and was used

for general operating costs of the City.

If you have any questions, please contact Steven Mar, Chief, Local Government Audits Bureau,

at (916) 324-7226.

Sincerely,

Original signed by

JEFFREY V. BROWNFIELD, CPA

Chief, Division of Audits

JVB/kw

Page 3: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

Anthony Silva, Mayor -2- August 5, 2013

cc: Bob Deis, City Manager

City of Stockton

Vanessa Burke, CFO, Administrative Services

City of Stockton

Laurie Montes, Deputy City Manager

City of Stockton

Kurt Wilson, Deputy City Manager

City of Stockton

Elena Adair, Assistant Director, Administrative Services Department

City of Stockton

Paul Canepa, Vice Mayor

City of Stockton

Elbert H. Holman, Jr., Council Member

City of Stockton

Kathy Miller, Council Member

City of Stockton

Moses Zapien, Council Member

City of Stockton

Dyane Burgos, Council Member

City of Stockton

Michael Tubbs, Council Member

City of Stockton

Steven Mar, Bureau Chief

Division of Audits, State Controller’s Office

Mike Spalj, Audit Manager

Division of Audits, State Controller’s Office

Chris Lek, Audit Manager

Division of Audits, State Controller’s Office

Daniel Finau, Auditor–in–Charge

Division of Audits, State Controller’s Office

Page 4: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

Contents

Audit Report

Summary ............................................................................................................................ 1

Background ........................................................................................................................ 1

Objective, Scope, and Methodology ................................................................................. 2

Conclusion .......................................................................................................................... 2

Follow-Up on Prior Audit Findings ................................................................................. 3

Views of Responsible Officials .......................................................................................... 3

Restricted Use .................................................................................................................... 3

Schedule 1—Reconciliation of Fund Balance ...................................................................... 4

Findings and Recommendations ........................................................................................... 5

Attachment—City’s Response to Draft Audit Report

Page 5: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-1-

Audit Report

The State Controller’s Office audited the City of Stockton’s Special Gas

Tax Street Improvement Fund for the period of July 1, 2004, through

June 30, 2011. We also audited the Traffic Congestion Relief Fund for

the period of July 1, 2004, through June 30, 2011. In addition, we audited

the Proposition 1B Fund for the period of July 1, 2007, through June 30,

2011.

Our audit found that the City accounted for and expended its Special Gas

Tax Street Improvement Fund, Traffic Congestion Relief Fund, and

Proposition 1B Fund in compliance with requirements, except the City

charged ineligible interest expense of $10,686 to the Gas Tax Fund,

through negative interest allocation, and thereby understated the fund

balance of the Gas Tax Fund by $10,686. The City also charged

ineligible interest expense of $45,469 to the Traffic Congestion Relief

Fund, through negative interest allocation, but understated other eligible

expenditures by $45,469. Overall, the Traffic Congestion Relief Fund balance is unchanged. In addition, the Gas Tax Fund cash was impaired

because it was pooled with other funds and was used for general

operating costs of the City.

The State apportions funds monthly from the highway users tax account

in the transportation tax fund to cities and counties for the construction,

maintenance, and operation of local streets and roads. The highway users

taxes derive from state taxes on the sale of motor vehicle fuels. In

accordance with Article XIX of the California Constitution and Streets

and Highways Code section 2113, a city must deposit all apportionments

of highway users taxes in its Special Gas Tax Street Improvement Fund.

In addition, a city must expend gas tax funds only for street-related

purposes pursuant to Streets and Highways Code section 2101. We

conducted our audit of the City’s Special Gas Tax Street Improvement

Fund under the authority of Government Code section 12410.

Government Code section 14556.5 created a Traffic Congestion Relief

Fund (TCRF) in the State Treasury for allocating funds quarterly to cities

and counties for street or road maintenance, reconstruction, and storm

damage repair. Cities must deposit funds received into the city account

designated for the receipt of state funds allocated for transportation

purposes. The City recorded its TCRF allocations in the Traffic

Congestion Relief Fund. We conducted our audit of the City’s Traffic

Congestion Relief Fund under the authority of Revenue and Taxation

Code section 7104.

Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and

Port Security Bond Act of 2006, was introduced as Proposition 1B and

approved by the voters on November 7, 2006, for a variety of

transportation priorities, including the maintenance and improvement of

local transportation facilities. Proposition 1B funds transferred to cities

and counties shall be deposited into an account that is designated for the

receipt of state funds allocated for streets and roads. The City recorded

its Proposition 1B allocations in the Proposition 1B Fund. A city also is

Summary

Background

Page 6: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-2-

required to expend its allocations within three years following the end of

the fiscal year in which the allocation was made and to be expended in

compliance with Government Code section 8879.23. We conducted our

audit of the City’s Proposition 1B allocations under the authority of

Government Code section 12410.

Our audit objective was to determine whether the City accounted for and

expended the Special Gas Tax Street Improvement Fund, the Traffic

Congestion Relief Fund, and the Proposition 1B Fund in compliance

with Article XIX of the California Constitution and the Streets and

Highways Code. To meet the audit objective, we determined whether the

City:

Properly deposited highway users tax apportionments and other

appropriate revenues in the Special Gas Tax Street Improvement

Fund;

Properly deposited TCRF allocations into an account designated for

the receipt of state funds allocated for transportation purposes;

Expended funds exclusively for authorized street-related purposes;

Proposition 1B funds expended in compliance with Government Code

section 8879.23; and

Made available unexpended funds for future expenditures.

We conducted this audit in accordance with generally accepted

government auditing standards. Those standards require that we plan and

perform the audit to obtain sufficient, appropriate evidence to provide a

reasonable basis for our findings and conclusions based on our audit

objectives. We believe that the evidence obtained provides a reasonable

basis for our findings and conclusions based on our audit objectives.

We did not audit the City’s financial statements. We limited our audit

scope to planning and performing the audit procedures necessary to

obtain reasonable assurance that the City accounted for and expended the

Special Gas Tax Street Improvement Fund and the Traffic Congestion

Relief Fund in accordance with the requirements of the Streets and

Highways Code and Revenue and Taxation Code section 7104.

Our audit found that the City of Stockton accounted for and expended its

Special Gas Tax Street Improvement Fund in compliance with

Article XIX of the California Constitution and the Streets and Highways

Code for the period of July 1, 2004, through June 30, 2011, except as

noted in Schedule 1 and described in the Findings and Recommendations

section of this report. The findings required an adjustment of $10,686 to

the City’s accounting records.

Objective, Scope,

and Methodology

Conclusion

Page 7: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-3-

Our audit also found that the City accounted for and expended its Traffic

Congestion Relief Fund in compliance with Article XIX of the California

Constitution, the Streets and Highways Code, and Revenue and Taxation

Code section 7104 for the period of July 1, 2004, through June 30, 2011,

except as noted in Schedule 1 and described in the Findings and

Recommendations section of this report. The findings require a

reclassification adjustment of $45,469 to the City’s accounting records.

Furthermore, Proposition 1B allocations recorded in the Proposition 1B

Fund were accounted for and expended in compliance with Government

Code section 8879.23 for the period July 1, 2007, through June 30, 2011.

The City satisfactorily resolved the findings noted in our prior audit

report, issued in September 2006.

We issued a draft on June 24, 2013. Vanessa Burke, Chief Financial

Officer, responded by a letter dated July 12, 2013, disagreeing with the

audit results. The City’s response (refer to pages 11-14) is included in

this final report as an attachment.

This report is intended for the information and use of the City of

Stockton’s management and the SCO; it is not intended to be and should

not be used by anyone other than these specified parties. This restriction

is not intended to limit distribution of this report, which is a matter of

public record.

Original signed by

JEFFREY V. BROWNFIELD

Chief, Division of Audits

August 5, 2013

Restricted Use

Views of

Responsible

Officials

Follow-Up on Prior Audit Findings

Page 8: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-4-

Schedule 1—

Reconciliation of Fund Balance

July 1, 2010, through June 30, 2011

Special Gas

Tax Street

Improvement

Fund 1

Proposition 1B

Fund 2

Traffic

Congestion

Relief Fund 3

Beginning fund balance per city $ 786,410 $ 4,210,235 $ 371,674

Revenues 9,003,613 — 147,563

Total funds available 9,790,023 4,210,235 519,237

Expenditures (8,798,675) 97,778 (519,237)

Ending fund balance per city 991,348 4,308,013 —

SCO adjustments: 4

Finding 1—Negative interest charged–GTF 10,686 — —

Finding 2—Negative interest charged–TCRF — — 45,469

Other TCRF eligible expenditures — — (45,469)

Total SCO adjustments 10,686 — —

Ending fund balance per audit $ 1,002,034 $ 4,308,013 $ —

___________________________ 1 The City receives apportionments from the State highway users tax account, pursuant to Streets and Highways

Code sections 2103, 2105, 2106, 2107, and 2107.5. The basis of the apportionments for sections 2103, 2105,

2106, and 2107 varies, but the money may be used for any street purpose. Streets and Highways Code section

2107.5 restricts apportionments to administration and engineering expenditures, except for cities with populations

of fewer than 10,000 inhabitants. Those cities may use the funds for rights-of-way and for the construction of

street systems. The audit period was July 1, 2004, through June 30, 2011; however, this schedule includes only the

period of July 1, 2010, through June 30, 2011. 2 Senate Bill 1266, Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, introduced as Proposition 1B, provided funds for a variety of transportation priorities.

3 Government Code section 14556.5 created a Traffic Congestion Relief Fund (TCRF) in the State Treasury for allocating funds quarterly to cities and counties for street and road maintenance, reconstruction, and storm damage repair. The TCRF allocations were recorded in the Traffic Congestion Relief Fund. The audit period was July 1, 2004, through June 30, 2011.

4 See the Findings and Recommendations section.

Page 9: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-5-

Findings and Recommendations

The City of Stockton’s Special Gas Tax Street Improvement Fund (Gas

Tax Fund) had negative cash balances at various times during fiscal year

(FY) 2004-05 through FY 2010-11. The negative cash balances caused

the City to charge interest expense through negative interest allocation to

the Gas Tax Fund.

Streets and Highways Code section 2101 specifies that highway users tax

apportionments are to be expended only for the construction,

maintenance, and operation of public streets and roads, construction of

exclusive public mass transit guide ways, and related administrative

costs. Negative interest is not an eligible expenditure per the Streets and

Highways Code.

Recommendation

The City should transfer $10,686 into the Gas Tax Fund. In addition, the

City should establish procedures to ensure that interest allocations to the

Gas Tax Fund are not computed with negative cash balances.

City of Stockton’s Management Response

Management disagrees with this finding. The reference made in the

Audit Findings and Recommendations to the Streets and Highways

Code section 2101 does not preclude negative interest as an eligible

expenditure per the Streets and Highways Code. In fact, the code

indicates that interest from investment of the funds should be deposited

into the fund on a rational and equitable basis. As disclosed in Table B,

the fund typically runs negative, which is a cost to the City for the

operation of the fund due to delay in the receipt of appropriations as

compared to spending patterns. We believe that the model is equitable

and rational and supports the charges to the fund.

In addition, upon review of the Guidelines Relating to Gas Tax

Expenditures for Cities and Counties (Guidelines), issued by the

California State Controller, May 2004, negative interest (interest

charge) is not cited as one of the ineligible expenditures.

Section 2113 of the Streets and Highways Code states that “Interest

received by a city from the investment of money in its special gas tax

street improvement fund shall be deposited in the fund and shall be

used for street purposes”. Reference is also made in the Guidelines

under Special Accounting Requirements for Cities that interest received

by a city from the investment of money in its Special Gas Tax Street

Improvement Fund shall be deposited in the fund and shall be used for

street purposes. In the SCO supporting analysis, interest earnings

activities in the Gas Tax Fund were reviewed from FY 2005 through

FY 2011. It appears the SCO selectively chose only months in which

this fund was allocated negative earnings to calculate the amount, while

failing to take into account that these are entirely offset with positive

allocation months during those same periods to arrive at the $10,686

amount of negative interest allocation. Overall during the audit period

from FY 2005 through 2011, on an annual basis the Gas Tax Fund

received a net positive interest allocation of $179,152.

FINDING 1—

Negative interest

charged – Gas Tax

Fund

Page 10: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-6-

For the pooled cash concept to work, funds must be charged

appropriately when they rely on other funds for cash flow and be

credited fairly when the funds contribute to interest earnings. This is

accomplished by following the practice of pooling cash and

investments of all funds, except for funds required to be held by fiscal

agents under the provisions of bond indentures. Prior to July 1, 2011,

interest income earned on pooled cash and investments was allocated

on a monthly basis to the various funds based on average daily cash

balances and a fair market value at year end. Effective July 1, 2011, the

City changed its accounting policy and method to a quarterly allocation

of accrued interest and fair market valuation adjustments on the basis of

average daily cash balances. This change was made on a prospective

basis.

The City’s position is that the Gas Tax Fund received its equitable pro-

ration of interest earned, positive or negative, and is used for street

purposes.

SCO’s Comment

The City disagrees with the finding.

The Gas Tax fund is a restricted Special Revenue Fund and does not

allow for borrowing, therefore cash balances should never be negative

and negative interest should not be allocated.

Article XIX of the California Constitution, Streets and Highways Code,

and Guidelines Relating to Gas Tax Expenditures for Cities and Counties

provides for allowable uses of gas tax funds such as research, planning,

construction, improvement, maintenance, and operation of public streets

and highways. Negative interest charges do not fall under any of the

above categories.

Although the gas tax cash balance at times run negative, due to the

timing of apportionments as compared to spending patterns, this is done

at the City’s discretion.

The finding remains as stated.

The City’s Traffic Congestion Relief Fund (TCRF) had negative cash

balances at various times during FY 2004-05 through FY 2010-11. The

negative cash balances caused the City to charge interest expense

through negative interest allocation to the Traffic Congestion Relief

Fund.

Streets and Highways Code section 2101 specifies that highway users tax

apportionments are to be expended only for the construction,

maintenance, and operation of public streets and roads, construction of

exclusive public mass transit guide ways, and related administrative

costs. Negative interest is not an eligible expenditure per the Streets and

Highways Code.

FINDING 2—

Negative interest

charged – TCRF

Page 11: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-7-

Recommendation

The City should transfer $45,469 into the Traffic Congestion Relief

Fund. As there are other eligible TCRF expenditures, the City should

increase the TCRF expenditures by $45,469. Overall, the Traffic

Congestion Relief Fund balance should remain the same. In addition, the

City should establish procedures to ensure that interest allocations to the

Traffic Congestion Relief Fund are not computed with negative cash

balances.

City of Stockton’s Management Response

Management disagrees with this finding. The reference made in the

Audit Findings and Recommendations to the Streets and Highways

Code section 2101 does not state that negative interest is not an eligible

expenditure per the Streets and Highways Code. Please see responses to

Finding 1.

SCO’s Comment

Please refer to SCO’s comments to Finding 1.

The City’s Gas Tax Fund was impaired by the General Fund at various

times during FY 2008-09, FY 2009-10, and FY 2010-11. The General

Fund is the main operating fund and its cash is maintained in an

investment pool with cash from other funds, including restricted funds

(such as the Gas Tax Fund). During our review, we noted that the

General Fund was reporting negative cash balances at various times

during FY 2008-09, FY 2009-10, and FY 2010-11. The negative cash

balances were impairing and affecting the integrity of the Gas Tax Fund.

Fiscal Year

FY 2008-09

FY 2009-10

FY 2010-11

Month

General Fund

General Fund

General Fund

July

(25,248,914)

(21,548,014)

(1,799,496)

August

(29,519,630)

(24,594,681)

(6,622,644)

September

(25,943,960)

(23,400,406)

(11,971,146)

October

(22,203,955)

(19,418,317)

(18,752,254)

November

(28,492,716)

(20,487,250)

(24,153,512)

December

(18,596,701)

(11,235,036)

(16,849,320)

January

(30,251,371)

(24,614,562)

(16,723,166)

February

(17,703,463)

(16,566,645)

(8,917,656)

March

(21,114,495)

(18,455,345)

(11,334,763)

April

(16,200,957)

(12,368,716)

(10,415,417)

May

(16,430,315)

(14,040,656)

(13,225,742)

June

2,276,869

(390,947)

(9,213,475)

FINDING 3—

Impairment of cash

Page 12: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-8-

Streets and Highways Code section 2101 specifies that highway users tax

apportionments are to be expended only for the construction,

maintenance, and operation of public streets and roads, construction of

exclusive public mass transit guide ways, and related administrative

costs.

California Streets and Highways Code section 2118 states that:

When the State Controller determines it to be necessary, he may require

a county or city to deposit money received from the highway users tax

allocations in a separate bank account.

Recommendation

The City should develop and implement policies and procedures to

ensure that it does not impair other funds’ cash, especially the restricted

funds, for general operating costs.

The City must establish a separate bank account for the Gas Tax Fund.

This account shall be used to record all deposits and expenditures against

these moneys. The City must provide the State Controller’s Office with

proof that a separate bank account has been established. The bank

account shall remain open until the City provides evidence that it has

restored the financial health of the General Fund.

The City of Stockton’s Management Response

Management disagrees with the Finding. The SCO in their analysis

failed to include funds that are unrestricted that are included in the

General Fund for the Comprehensive Annual Financial Report (CAFR)

but segregated in the accounting system for tracking purposes. These

funds consist of the Library, Recreation, Entertainment Venues, and

other auxiliary fee and general funded operations.

When including these funds the general fund cash position is reported

as follows:

Table A

Fiscal Year

Month

FY 2008-09

General Fund

FY 2009-10

General Fund

FY 2010-11

General Fund

July

15,932,712

(12,755,358)

8,414,340

August

9,499,858

17,756,413

4,295,118

September

1,451,377

19,734,058

(1,039,616)

October

3,380,078

13,040,522

(7,960,241)

November

2,320,036

7,178,133

(11,600,274)

December

7,211,211

15,702,056

(5,967,707)

January

9,450,199

17,654,537

(7,840,504)

February

22,928,602

25,219,403

1,229,409

March

19,722,838

29,224,060

(613,797)

April

23,889,817

30,280,001

153,760

May

23,640,387

28,699,751

(2,319,246)

June

11,496,667

11,406,061

12,977,884

Page 13: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-9-

In addition, in FY 2009-2010, the SCO failed to consider that the City

had access and utilized a $32,180,000 2009 CSCDA Tax Revenue

Anticipation Note {TRAN) to fund cash flow deficiencies. In the table

below, the months in which the corrected general fund cash deficits

arose, there was sufficient cash in the TRAN, the borrowing funds

established per accounting policy (e.g. self-insurance funds) that was

sufficient to cover any shortfall in the general fund. In addition, in most

months the Gas Tax Fund had a cash deficit and wouldn’t have been a

fund to borrow from but was borrowing in reverse from the General

Fund to cover cost incurred prior to receipt of the apportionments from

the State of California. The Gas Tax Fund cash position as a percentage

of the total restricted cash position is less than 1% on average and

would not be impaired and is a fund of last resort not a fund of first

resort.

Based on the review of the Article XIX of the California Constitution,

Streets and Highway Code Sections 2100-2128.1 and Sections 2150-

5157, and Guidelines Relating to Gas Tax Expenditures for Cities and

Counties issued by the State Controller's Office in May 2004, none of

the publications discuss impairment of cash in the pooled cash system.

In addition, there is no guidance about whether deficit cash balances in

funds participating in the pooled cash arrangement create

“impairment.”

The City’s policy is to use City’s Workers Compensation and General

Liability Internal Service Funds as the lending funds to other City

funds with negative cash position at the end of each fiscal year as

reported in Note 3 to the City’s CAFR. The same policy is applied

during any given fiscal year. The monthly cash balance reports for all

City funds covering fiscal years 2008-09, 2009-10 and 2010-11 that

were provided for your review, show that there were sufficient cash

balances in the Workers’ Compensation and General Liability Internal

Service Funds every month in which General Fund cash balance went

negative, except for November 2011. However, in that same month

both the Gas Tax Fund and Traffic Congestion Relief Fund cash

balances were negative, making it impossible for the General Fund to

borrow money from them.

In reviewing the month end cash balances of the gas tax/federal funds

as compared to the restricted funds in total and applying the established

City policy, the SCO has lept to an incorrect conclusion. Our analysis

shows that the gas tax funds, as a percentage to the total of all other

restricted funds, during the period of the audit are insignificant to be a

borrowing fund and in fact are a borrowing fund themselves. See Table

B below.

The City carefully monitors its available unrestricted fund balances to

assure that there is no draw on the restricted funds cash that the City is

not able to repay by the end of the fiscal year. The City actually sought

bankruptcy protection because of its general fund insolvency and to

avoid any chance that the general fund would not be balanced and

begin implicitly borrowing from restricted funds. To emphasize the

matter further, the City has been vigorously defending its position in

the bankruptcy court of not using restricted funds cash for the

operations of the City’s General Fund.

Page 14: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-10-

Table B

General Fund

Totals

Gas Tax Fund

Totals

Traffic

Congestion

Relief Fund

Totals

All Restricted

Fund Totals

% of All

Restricted Funds

Gas Tax TCRF

Jul-08 15,932,712

199,500

27,443

280,237,562

0.07% 0.01%

Aug-08 9,499,858

197,704

(507)

251,844,293

0.08% 0.00%

Sep-08 1,451,377

1,414,918

(43,460)

250,241,603

0.57% -0.02%

Oct-08 3,380,078

592,754

641,495

239,820,082

0.25% 0.27%

Nov-08 2,320,036

585,628

460,568

224,187,668

0.26% 0.21%

Dec-08 7,211,211

1,381,983

174,928

240,067,960

0.58% 0.07%

Jan-09 9,450,199

536,417

205,974

242,785,314

0.22% 0.09%

Feb-09 22,928,602

536,982

66,248

230,707,210

0.23% 0.03%

Mar-09 19,722,838

537,253

(532,248)

217,117,725

0.25% -0.25%

Apr-09 23,889,817

224,495

(158,979)

226,183,694

0.10% -0.07%

May-09 23,640,387

225,103

(160,194)

239,539,563

0.09% -0.07%

Jun-09 11,496,667

2,182,944

(160,857)

256,420,068

0.85% -0.06%

Jul-09 (12,755,358) (127,952) 422,373 244,953,050 -0.05% 0.17%

Aug-09 17,756,413

(562,012)

422,373

220,645,661

-0.26% 0.19%

Sep-09 19,734,058

(707,045)

423,991

228,142,310

-0.31% 0.19%

Oct-09 13,040,522

(635,138)

368,440)

230,964,027

-0.28% -0.160%

Nov-09 7,178,133

112,710

(1,627,909)

221,399,297

0.05% -0.74%

Dec-09 15,702,056

(258,122)

(2,429,013)

225,051,732

-0.12% -1.08%

Jan-10 17,654,537

(562,775)

(2,738,858)

227,766,330

-0.25% -1.20%

Feb-10 25,219,403

(867,609)

(2,746,250)

215,177,205

-0.40% -1.28%

Mar-10 29,224,060

(982,387)

(1,652,004)

205,273,229

-0.48% -0.81%

Apr-10 30,280,001

924,360

(947,762)

228,873,441

0.40% -0.41%

May-10 28,699,751

713,098

(949,883)

218,088,904

0.33% -0.44%

Jun-10 11,406,061

1,041,534

(201,770)

231,186,393

0.45% -0.09%

Jul-10 8,414,340 625,728 529,822 242,967,128 0.26% 0.22%

Aug-10 4,295,118

(19,249)

377,776

198,796,802

-0.01% 0.19%

Sep-10 (1,039,616)

(414,064)

380,195

195,745,663

-0.21% 0.19%

Oct-10 (7,960,241)

(619,399)

(60,550)

217,309,059

-0.29% -0.03%

Nov-10 (11,600,274)

(80,843)

(139,179)

205,636,212

-0.04% -0.07%

Dec-10 (5,967,707)

(271,438)

(140,598)

209,296,338

-0.13% -0.07%

Jan-11 (7,840,504)

(13,753)

(141,552)

220,681,557

-0.01% -0.06%

Feb-11 1,229,409

271,661

(141,698)

214,154,905

0.13% -0.07%

Mar-11 (613,797)

487,110

(141,917)

191,293,614

0.26% -0.07%

Apr-11 153,760

131,613

(142,157)

204,055,521

0.06% -0.07%

May-11 (2,319,246)

908,890

(142,483)

202,010,258

0.45% -0.07%

Jun-11 12,977,884

766,167

––

222,920,565

0.34% 0.00%

SCO’s Comment

The City disagrees with the finding.

The City’s General Fund cash position in the FY 2010-11

Comprehensive Annual Financial Report (CAFR), included other

unrestricted funds such as Library, Recreation, Entertainment Venues,

and other auxiliary fee and general funded operations. Even with the

inclusion of those funds, there are still negative cash balances for a

number of months, therefore impairing other funds with positive

balances.

Page 15: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

-11-

The City claims to have access to and can utilize a 2009 CSCDA Tax

Revenue Anticipation Note (TRAN) to fund cash flow deficiencies, but

this was not utilized. The City also claims to have a policy to use City’s

Workers Compensation and General Liability Internal Service Funds as

lending funds (Note 3 - CAFR). This is incorrect. Note 3 does not define

a policy and the funds noted above were not used.

Finally, the fact that Gas Tax cash represents a small percentage of the

cash investment pool and also has some months of negative balances

does not prevent it from being potentially impaired when its balances are

positive. Also, as discussed under SCO’s response to Finding 1, the Gas

Tax Fund is a restricted Special Revenue Fund and does not allow for

borrowing from other funds, therefore cash balances should never be

negative.

The finding remains as stated.

Page 16: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

City of Stockton Special Gas Tax Street Improvement Fund and Traffic Congestion Relief Fund

Attachment—

City’s Response to Draft Review Report

Page 17: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 18: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 19: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 20: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 21: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 22: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 23: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 24: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 25: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 26: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 27: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 28: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 29: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 30: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 31: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through
Page 32: SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, …SPECIAL GAS TAX STREET IMPROVEMENT FUND July 1, 2004, through June 30, 2011 TRAFFIC CONGESTION RELIEF FUND July 1, 2004, through

State Controller’s Office

Division of Audits

Post Office Box 942850

Sacramento, CA 94250-5874

http://www.sco.ca.gov

S12–GTA–016